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Talk of a housing bubble has gone from chatter to roar in the past few weeks, and for good reason. The backlog of unsold new homes has risen sharply, the growth of the median new-home price stalled in August, and -- worst of all -- housing affordability is at its lowest since the depressing times of September, 1991.

Evidence is mounting that the prolonged boom in housing prices is finally winding down. The question is, what happens next?

Extended stall?
Contrary to the predictions of some bubble-watchers, it's highly unlikely that housing prices will crash a la Nasdaq, 2000. What's more likely is that prices will fall, possibly by double-digit percentages, in a few of the most overheated markets -- parts of California, Florida, and other coastal hot spots.

In the midsection of the country, where housing inflation only caught fire in the last year or so, prices are still reasonable and are likely to keep going up. In-between markets like Boston, New York, and Washington, D.C., may just stall for an extended period.

Of course, predicting what will happen in speculative housing markets is just another form of speculation. But since the outlook for prices is on every homebuyer's and homeowner's mind, it's worth taking a close look at the tea leaves.

'Inventory overhang'The bearish case for housing is well expressed by David Rosenberg, the chief North American economist of Merrill Lynch (MER). He points out that according to the Census Bureau, the backlog of unsold new homes hit 4.7 months' worth of supply in August. That was the most since January, 2000. He calls this a demonstration of "inventory overhang." Rosenberg also notes that the year-on-year trend in median new-home prices is running at a little over 1%, well off the 18 percent peak posted in October, 2004.

Homebuilders and brokers have a plausible answer to both of those points. Michael Carliner, an economist for the National Association of Homebuilders, says that the Census data on unsold new homes includes permits for homes that haven't even been built yet. Builders are taking out permits farther ahead of construction than they used to. The backlog of new homes that have actually been completed was lower in August than it was a year earlier, Carliner says.

As for median new-home prices, S. Lawrence Yun, a senior economist for the National Association of Realtors, says the sluggish increase probably reflects a change in the mix of homes sold -- a bigger share were built in cheaper areas, or the new homes were smaller, dragging down the year-over-year comparison.

'Signs of a slowdown'The one scary stat that housing optimists have a hard time countering is the decline in people's ability to buy homes. According to the National Association of Realtors' monthly measure, affordability in August fell to its lowest level since September, 1991. As Merrill's Rosenberg points out, that turned out to be a bearish signal in 1991. The 12-month trend in average new-home prices fell from plus 4 percent to minus 3.5 percent over the following year. Houses will become more unaffordable if interest rates continue to rise.

That's why even the sanguine think the boom is more or less over. Says Yum: "Given that affordability is becoming an issue, one would anticipate that some of the enthusiasm would taper off." Carliner agrees: "I do think there are signs of a slowdown."

What do people at the frontlines of the housing wars think? Pam O'Connor, president and CEO of RELO/Leading Real Estate Companies of the World, a network of independent real estate companies, says she's hearing about softness in some of the markets well-known to be high-priced, such as Sacramento, where she was told inventories of unsold homes were double what they were a year earlier.

Fair fundamentals?"Everybody has a sense that sooner or later this cycle's going to turn," O'Connor says. "But overall, unless there's a major change, the fundamentals still look pretty good," she adds, citing relatively low unemployment and fairly strong economic growth.

There's no question that housing prices aren't booming the way they were as recently as a few months ago. But people expecting a big bang to signal the end of the boom needn't cover their ears.